Economy in intensive care while G7 squabbles

WASHINGTON (MarketWatch) -- Global economic recovery will take coordinated action among all the big economies, the International Monetary Fund warned this week, but as the IMF's spring meeting opens in Washington this weekend, the big economies are still squabbling over who's to blame for the crisis, and who should bear the cost of fixing it.

That's about the shape of things as financial leaders from the Group of Seven and larger Group of 20 gather Friday for the next round of meetings to try to put the global economy back together.

The meetings come only three weeks after President Barack Obama joined his G20 colleagues in London to set the agenda for global recovery.

Although hailed by many at the time, the G20 leaders' agreement now seems to be less than meets the eye.

The leaders could not make progress on further stimulus measures or on new global regulation for the out-of-control financial sector. The one initiative they could all agree on was to give the IMF a ton of new funding to lend to countries in trouble, and the G20 ultimately pledged a headline-grabbing $1.1 trillion in loans and guarantees to the international agency.

"Leaders love to give the IMF an assignment when they don't know what else to do," said Timothy Adams, a former Treasury undersecretary of international affairs in the Bush administration.

There is plenty of skepticism about this initiative.

More money for the IMF is nice, but it is "hardy going to solve the world's crisis," said Desmond Lachman, a former IMF official and now an analyst at the American Enterprise Institute.

"The big question this weekend is whether the amount of resources announced at G20 will be translated into firm commitments," said Eswar Prasad, a senior fellow on the global economy at the Brookings Institute, and a former IMF official.

A "complicated tussle" has broken out at the IMF between the industrial nations and emerging countries, Prasad said.

The emerging economies want to link more resources to more voting power at the IMF. The G7 wants the funding now with the promise of voting reform by 2011.

Experts say the global response to the financial crisis is hampered by two important factors: a continued state of denial in continental Europe about the crisis, and a sputtering effort by the United States to clean up its broken banks.

Of about $500 billion promised for one IMF program, only about $215 billion appears solid going into the weekend meeting, Prasad said.

The White House has promised an additional $100 billion, but Prasad said he wasn't including it in his count because it requires approval from Congress.

Experts said that the global response to the financial crisis is hampered by two important factors: a continued state of denial in continental Europe about the crisis, and a sputtering effort by the United States to clean up its broken banks.

Other foreign leaders are going to press Treasury Secretary Timothy Geithner on the U.S. government's stress test for banks and what will happen after they are completed.

Given the trouble with the U.S. banking sector, Geithner is "not in the position" to push any other nation to take measures, experts said.

"There are no clear signs that Geithner's leading the agenda," Prasad said.

In a speech earlier this week, Geithner attempted to stress areas of agreement among the nations, saying that all countries were caught "in the same storm." See full story.

The IMF released a chilling forecast for the global economy over the next two years, saying that the recession was going to be the deepest since World War II. See full story.

The financial crisis, which has morphed into a nasty global recession, is "far from over," said Dominique Strauss-Kahn, the head of the International Monetary Fund, at a press conference on Thursday.

"We're in for a long, tough slog," said Adams, the former Bush official.

The U.S. consumer was the engine for global growth for many decades and it is not clear what will be the new engine, Adams said. "U.S. consumers are tapped out."

Losses from the financial crisis could top $4 trillion, the IMF warned. See full story.

All of this "has a ring of the 1930s," said Lachman.

In Europe, Spain, Ireland and Greece have seen their economies slow abruptly. Their finances are in such bad shape that the other euro-zone nations may have to step in with assistance, analysts said.

Like the United States, Spain and Ireland experienced the bursting of a housing bubble, but these countries are unable to slash interest rates like the Federal Reserve was able to because they don't have their own central bank.

Unemployment has spiked in Spain to above 15%.

At the same time, Eastern Europe is in crisis and may require a large rescue package on the scale of the Asian financial crisis of the late 1990s.

Countries in the region borrowed heavily to catch up with the developed world but the funding has dried up as a result of the credit crisis.

This implies a sharp decline in economic activity. The region has also been hit by less demand for manufactured exports.

The United States believes that Germany "really holds the key," to these two problems, Lachman said.

Further stimulus from Germany would help the weaker euro-member states and also create a more favorable environment for Eastern Europe to try to work its way out of its trap.

Geithner and the IMF are trying to get across to Germany that this is truly a global synchronized downturn and it needs a global synchronized response, Lachman said.

"If only some countries participate, it is not going to work," Lachman said.

The G20 doesn't have such a great track record even though it has only been three weeks since their meeting.

Despite a pledge from G20 leaders in London only three weeks ago to avoid trade wars, almost half returned home to take up measures to restrict trade, World Bank President Robert Zoellick said.

Nine G20 countries have taken or are considering 23 measures that would restrict trade, Zoellick said.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.